An argument why Dubai house prices should double

May 13, 2004 2:46 pm

It is interesting to draw a parallel between the new Dubai freehold property market and Singapore. In Singapore rental prices are similar to Dubai but property prices are double.

Is that what is going to happen in Dubai? Or will Dubai rentals collapse due to oversupply sending property prices lower? It is too early to make a definitive judgment on this critical point, but let us examine the arguments.

One phenomenon of global real estate markets in recent years has been static rentals and rising property prices. This is mainly due to falling interest rates which have jacked up the real value of rentals and therefore property prices.

But the Dubai market has yet to adjust to this phenomenon, perhaps because the mortgage market is very underdeveloped as yet, and most property is bought with cash.

Thus as the legal position is clarified in Dubai and banks develop their mortgage lending to something nearer to normal world levels then it would be reasonable to expect an expansion of local credit to push up house prices, unless supply exceeds demand.

Now it may be that at some point in the future supply will exceed demand. It certainly does not at present, as those who are shopping for property will find out. In the interim period, there is plenty of scope for prices to go up, and to align the rental/property price equation, or yield, with global norms.

Hence, Dubai real estate would move to Singapore price levels with rentals probably pretty much where they stand today. To be more gloomy about the outlook, you need to throw in some unexpected nasty events which history demonstrates are really to be expected.

Say the oil price tumbles later this year and Dubai’s role as a regional trading hub comes under pressure due to lower orders from neighboring states. That would have a knock on effect in the local real estate market with companies downsizing and lower demand for accommodation.

However, it would not necessarily derail Dubai realty completely. In 1998 a similar downturn did not result in plunging rentals much to the dismay of some residents. But real estate development would certainly slowdown.

One final thought, the cost of building materials is advancing rapidly at the moment, and that is another reason to think that property prices will rise. If houses cost more to build, then the price has to go up, or the developer goes bankrupt.

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